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Why are banks so susceptible to fraud? I don’t mean fraud committed against banks, but rather fraud perpetrated by banks or fraud facilitated by bank conduct.

Last week, the Toronto-Dominion Bank’s U.S. branch was fined $52.5 million by U.S. regulators for its role in a $1.2 billion Ponzi scheme operated by a lawyer, Scott Rothstein.

According to the U.S. Department of the Treasury, the bank ignored customer account activity which “repeatedly triggered alerts in the Bank’s anti-money laundering monitoring system.” According to the SEC, the bank “defrauded investors by producing a series of misleading documents and making false statements about accounts that Rothstein held at the bank and used to perpetuate his scheme.”

Last year the Royal Bank of Canada agreed to pay $17 million to settle a class-action lawsuit with victims of a Quebec Ponzi scheme operated by Earl Jones. Of course, it didn’t admit liability. RBC Dominion Securities and two brokers were also fined $700,000 for “failing in their duty to protect the financial markets” from the Ponzi scheme.

According to the book, Thieves of Bay Street: How Banks, Brokerages and the Wealthy Steal Billions From Canadians, by investigative journalist Bruce Livesey, RBC “overlooked glaring clues that Jones was running a scam.”

Bernie Madoff has implicated banks in his massive Ponzi scheme, stating various banks and hedge funds engaged in “willful blindness”, adding “they had to know”.

Of course, we can’t forget the CIBC’s role in the Enron fraud, which resulted in creditors’ losses of $38 billion. The bank settled civil claims of $2.4 billion (US) and paid an additional $80 million (US) in fines to the Securities and Exchange Commission.

Plus, we can’t overlook the role of the banks, including Canadian banks, in the financial crisis of 2008 related to the sale of subprime mortgages and other forms of bad debt converted into investment products and sold to an unsuspecting public. Nor can we overlook the manipulation of interest rates in the Libor scandal. According to Bloomberg Businessweek banks deliberately reported false borrowing costs which affected the “value of trillions of dollars of derivatives contracts, mortgages and consumer loans.”

These are but a few recent examples of bank misconduct. It’s almost as if there is a virus that has affected banks world-wide. Our supposedly staid, conservative Canadian banks haven’t proven immune. We can’t blame this on rogue employees.

They are too many incidents taking place over long periods of time to believe that.

Which leads me to ask what is it about banks and their culture that makes them susceptible to bad behaviour?

The answer is multi-faceted, but surely we must focus on the fact many banks have become above the law.

Sure, banks are sued and fined. Sometimes their employees are even prosecuted. But we never adequately punish banks.

Fines

If we impose fines that would actually hurt, we risk a bank failure, or harming shareholders.

In Canada, where we have a bank oligopoly with a limited number of chartered banks, each one is almost too big to fail.

If we were to levy appropriate penalties, we’d risk another financial crisis and further government intervention into the financial system.

Thus banks appear to have little incentive to perform their roles as “gatekeepers to the capital markets”, to comply with laws set up to weed out money launderers, Ponzi schemers or fraudsters, or not to sell us ill-conceived products they know are doomed to fail.

Since banks and bankers seem to love money, perhaps the only way to modify their behaviour is collective punishment. Perhaps we could prohibit bank executives from collecting bonuses in any year in which their banks engaged in or allowed others to engage in fraud.

Perhaps we could prohibit bank directors from receiving fat directors’ fees in such years.

That and criminal prosecutions, putting people in jail, might just work.

Why do banks commit so much fraud?

Probably because the punishments they receive aren’t enough of a deterrent

Why are banks so susceptible to fraud? I don’t mean fraud committed against banks, but rather fraud perpetrated by banks or fraud facilitated by bank conduct.

Last week, the Toronto-Dominion Bank’s U.S. branch was fined $52.5 million by U.S. regulators for its role in a $1.2 billion Ponzi scheme operated by a lawyer, Scott Rothstein.

According to the U.S. Department of the Treasury, the bank ignored customer account activity which “repeatedly triggered alerts in the Bank’s anti-money laundering monitoring system.” According to the SEC, the bank “defrauded investors by producing a series of misleading documents and making false statements about accounts that Rothstein held at the bank and used to perpetuate his scheme.”